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Section C: What are the myths of capitalist economics? (An Anarchist FAQ)
Section C: What are the myths of capitalist economics? is the third section of An Anarchist FAQ, outlining the various myths around capitalism and using them to launch harsh criticisms of the system. Chapters C.1 What is wrong with economics? C.1.1 Is economics really value free? C.1.2 Is economics a science? C.1.3 Can you have an economics based on individualism? C.1.4 What is wrong with equilibrium analysis? C.1.5 Does economics really reflect the reality of capitalism? C.1.6 Is it possible to a non-equilibrium based capitalist economics? C.2 Why is capitalism exploitative? C.2.1 What is “surplus value”? C.2.2 How does exploitation happen? C.2.3 Is owning capital sufficient reason to justify profits? C.2.4 Is profit the reward for the productivity of capital? C.2.5 Do profits represent the contribution of capital to production? C.2.6 Does interest represent the “time value” of money? C.2.7 Are interest and profit not the reward for waiting? C.2.8 Are profits the result of entrepreneurial activity and innovation? C.2.9 Do profits reflect a reward for risk? C.3 What determines the distribution between labour and capital? C.4 Why does the market become dominated by Big Business? C.4.1 How extensive is Big Business? C.4.2 What are the effects of Big Business on society? C.4.3 What does the existence of Big Business mean for economic theory and wage labour? C.5 Why does Big Business get a bigger slice of profits? C.5.1 Aren’t the super-profits of Big Business due to its higher efficiency? C.6 Can market dominance by Big Business change? C.7 What causes the capitalist business cycle? C.7.1 What role does class struggle play in the business cycle? C.7.2 What role does the market play in the business cycle? C.7.3 What role does investment play in the business cycle? C.8 Is state control of money the cause of the business cycle? C.8.1 Does this mean that Keynesianism works? C.8.2 What happened to Keynesianism in the 1970s? C.8.3 How did capitalism adjust to the crisis in Keynesianism? C.9 Would laissez-faire capitalism reduce unemployment? C.9.1 Would cutting wages reduce unemployment? C.9.2 Is unemployment caused by wages being too high? C.9.3 Are “flexible” labour markets the answer to unemployment? C.9.4 Is unemployment voluntary? C.10 Is “free market” capitalism the best way to reduce poverty? C.10.1 Hasn’t neo-liberalism benefited the world’s poor? C.10.2 Does “free trade” benefit everyone? C.10.3 Does “free market” capitalism benefit everyone, especially working class people? C.10.4 Does growth automatically mean people are better off? C.11 Doesn’t neo-liberalism in Chile prove that the free market benefits everyone? C.11.1 Who benefited from Chile’s “economic miracle”? C.11.2 What about Chile’s economic growth and low inflation? C.11.3 Did neo-liberal Chile confirm capitalist economics? C.12 Doesn’t Hong Kong show the potentials of “free market” capitalism? Transcript Within capitalism, economics plays an important ideological role. Economics has been used to construct a theory from which exploitation and oppression are excluded, by definition. We will attempt here to explain why capitalism is deeply exploitative. Elsewhere, in section B, we have indicated why capitalism is oppressive and will not repeat ourselves here. In many ways economics plays the role within capitalism that religion played in the Middle Ages, namely to provide justification for the dominant social system and hierarchies.“The priest keeps you docile and subjected,” argued Malatesta, “telling you everything is God’s will; the economist say it’s the law of nature.” They “end up saying that no one is responsible for poverty, so there’s no point rebelling against it.” [Fra Contadini, p. 21] Even worse, they usually argue that collective action by working class people is counterproductive and, like the priest, urge us to tolerate current oppression and exploitation with promises of a better future (in heaven for the priest, for the economist it is an unspecified “long run”). It would be no generalisation to state that if you want to find someone to rationalise and justify an obvious injustice or form of oppression then you should turn to an economist (preferably a “free market” one). That is not the only similarity between the “science” of economics and religion. Like religion, its basis in science is usually lacking and its theories more based upon “leaps of faith” than empirical fact. Indeed, it is hard to find a “science” more unconcerned about empirical evidence or building realistic models than economics. Just looking at the assumptions made in “perfect competition” shows that (see section C.1 for details). This means that economics is immune to such trivialities as evidence and fact, although that does not stop economics being used to rationalise and justify certain of these facts (such as exploitation and inequality). A classic example is the various ways economists have sought to explain what anarchists and other socialists have tended to call “surplus value” (i.e. profits, interest and rent). Rather than seek to explain its origin by an empirical study of the society it exists in (capitalism), economists have preferred to invent “just-so” stories, little a-historic parables about a past which never existed is used to illustrate (and so defend) a present class system and its inequalities and injustices. The lessons of a fairy tale about a society that has never existed are used as a guide for one which does and, by some strange co-incidence, they happen to justify the existing class system and its distribution of income. Hence the love of Robinson Crusoe in economics.Ironically, this favouring of theory (ideology would be a better term) is selective as their exposure as fundamentally flawed does not stop them being repeated. As we discuss in section C.2, the neoclassical theory of capital was proven to be incorrect by left-wing economists. This was admitted by their opponents: “The question that confronts us is not whether the Cambridge Criticism is theoretically valid. It is. Rather the question is an empirical or econometric one: is there sufficient substitutability within the system to establish neo-classical results?” Yet this did not stop this theory being taught to this day and the successful critique forgotten. Nor has econometrics successfully refuted the analysis, as capital specified in terms of money cannot reflect a theoretical substance (neo-classical “capital”) which could not exist in reality. However, that is unimportant for “until the econometricians have the answer for us, placing reliance upon neo-classical economic theory is a matter of faith, ”which, of course, he had E. Ferguson,The Neo-classical Theory of Production and Distribution, p. 266 and p. xvii Little wonder that Joan Robinson, one of the left-wing economists who helped expose the bankruptcy of the neo-classical theory of capital, stated that economics was “back where it was, a branch of theology.”Economic Papers, Vol. 4, p. 127 It remains there more than thirty years later: “Economics is not a science. Many economists — particularly those who believe that decisions on whether to get married can be reduced to an equation — see the world as a complex organism that can be understood using the right differential calculus. Yet everything we know about economics suggests that it is a branch and not a particularly advanced one, of witchcraft.” Elliot and Dan Atkinson, [[The Age of Insecurity (Book)|The Age of Insecurity], p. 226] The weakness of economics is even acknowledged by some within the profession itself. According to Paul Ormerod, “orthodox economics is in many ways an empty box. Its understanding of the world is similar to that of the physical sciences in the Middle Ages. A few insights have been obtained which stand the test of time, but they are very few indeed, and the whole basis of conventional economics is deeply flawed.” Moreover, he notes the “overwhelming empirical evidence against the validity of its theories.” It is rare to see an economist be so honest. The majority of economists seem happy to go on with their theories, trying to squeeze life into the Procrustean bed of their models. And, like the priests of old, make it hard for non-academics to question their dogmas as “economics is often intimidating. Its practitioners ... have erected around the discipline a barrier of jargon and mathematics which makes the subject difficult to penetrate for the non-initiated.”The Death of Economics, p. ix, p. 67 and p. ix] So in this section of our FAQ, we will try to get to the heart of modern capitalism, cutting through the ideological myths that supporters of the system have created around it. This will be a difficult task, as the divergence of the reality of capitalism and the economics that is used to explain (justify, more correctly) it is large. For example, the preferred model used in neo-classical economics is that of “perfect competition” which is based on a multitude of small firms producing homogenous products in a market which none of them are big enough to influence (i.e. have no market power). This theory was developed in the late 19th century when the real economy was marked by the rise of big business, a dominance which continues to this day. Nor can it be said that even small firms produce identical products — product differentiation and brand loyalty are key factors for any business. In other words, the model reflected (and still reflects) the exact opposite of reality. In spite of the theoretical models of economics having little or no relation to reality, they are used to both explain and justify the current system. As for the former, the truly staggering aspect of economics for those who value the scientific method is the immunity of its doctrines to empirical refutation (and, in some cases, theoretical refutation). The latter is the key to not only understanding why economics is in such a bad state but also why it stays like that. While economists like to portray themselves as objective scientists, merely analysing the system, the development of their “science” has always been marked with apologetics, with rationalising the injustices of the existing system. This can be seen best in attempts by economists to show that Chief Executive Officers (CEOs) of firms, capitalists and landlords all deserve their riches while workers should be grateful for what they get. As such, economics has never been value free simply because what it says affects people and society. This produces a market for economic ideology in which those economists who supply the demand will prosper. Thus we find many “fields of economics and economic policy where the responses of important economic professionals and the publicity given economic findings are correlated with the increased market demand for specific conclusions and a particular ideology.” [Edward S. Herman, “The Selling of Market Economics,” pp. 173–199, New Ways of Knowing, Marcus G. Raskin and Herbert J. Bernstein (eds.), p.192] Even if we assume the impossible, namely that economists and their ideology can truly be objective in the face of market demand for their services, there is a root problem with capitalist economics. This is that it the specific social relations and classes produced by capitalism have become embedded into the theory. Thus, as an example, the concepts of the marginal productivity of land and capital are assumed to universal in spite the fact that neither makes any sense outside an economy where one class of people owns the means of life while another sells their labour to them. Thus in an artisan/peasant society or one based around co-operatives, there would be no need for such concepts for in such societies, the distinction between wages and profits has no meaning and, as a result, there is no income to the owners of machinery and land and no need to explain it in terms of the “marginal productivity” of either. Thus mainstream economics takes the class structure of capitalism as a natural, eternal, fact and builds up from there. Anarchists, like other socialists, stress the opposite, namely that capitalism is a specific historical phase and, consequently, there are no universal economic laws and if you change the system the laws of economics change. Unless you are a capitalist economist, of course, when the same laws apply no matter what. In our discussion, it is important to remember that capitalist economics is not the same as the capitalist economy. The latter exists quite independently of the former (and, ironically, usually flourishes best when the policy makers ignore it). Dissident economist Steve Keen provides a telling analogy between economics and meteorology. Just as “the climate would exist even if there were no intellectual discipline of meteorology, the economy itself would exist whether or not the intellectual pursuit of economics existed.” Both share “a fundamental raison d’etre,” namely “that of attempting to understand a complex system.” However, there are differences. Like weather forecasters, “economists frequently get their forecasts of the economic future wrong. But in fact, though weather forecasts are sometimes incorrect, overall meteorologists have an enviable record of accurate prediction — whereas the economic record is tragically bad.” This means it is impossible to ignore economics (“to treat it and its practitioners as we these days treat astrologers”) as it is a social discipline and so what we “believe about economics therefore has an impact upon human society and the way we relate to one another.” Despite “the abysmal predictive record of their discipline,” economists “are forever recommending ways in which the institutional environment should be altered to make the economy work better.” By that they mean make the real economy more like their models, as “the hypothetical pure market performs better than the mixed economy in which we live.” Debunking Economics, pp. 6–8] Whether this actually makes the world a better place is irrelevant (indeed, economics has been so developed as to make such questions irrelevant as what happens on the market is, by definition, for the best). Here we expose the apologetics for what they are, expose the ideological role of economics as a means to justify, indeed ignore, exploitation and oppression. In the process of our discussion we will often expose the ideological apologetics that capitalist economics create to defend the status quo and the system of oppression and exploitation it produces. We will also attempt to show the deep flaws in the internal inconsistencies of mainstream economics. In addition, we will show how important reality is when evaluating the claims of economics. That this needs to be done can be seen by comparing the promise of economics with its actual results when applied in reality. Mainstream economics argues that it is based on the idea of “utility” in consumption, i.e. the subjective pleasure of individuals. Thus production is, it is claimed, aimed at meeting the demands of consumers. Yet for a system supposedly based on maximising individual happiness (“utility”), capitalism produces a hell of a lot of unhappy people. Some radical economists have tried to indicate this and have created an all-embracing measure of well-being called the Index of Sustainable Economic Welfare (ISEW). Their conclusions, as summarised by Elliot and Atkinson, are significant: “In the 1950s and 1960s the ISEW rose in tandem with per capita GDP. It was a time not just of rising incomes, but of greater social equity, low crime, full employment and expanding welfare states. But from the mid-1970s onwards the two measures started to move apart. GDP per head continued its inexorable rise, but the ISEW started to decline as a result of lengthening dole queues, social exclusion, the explosion in crime, habitat loss, environmental degradation and the growth of environment- and stress-related illness. By the start of the 1990s, the ISEW was almost back to the levels at which it started in the early 1950s.” Elliot and Dan Atkinson, Op. Cit., p. 248 So while capitalism continues to produce more and more goods and, presumably, maximises more and more individual utility, actual real people are being “irrational” and not realising they are, in fact, better off and happier. Ironically, when such unhappiness is pointed out most defenders of capitalism dismiss people’s expressed woe’s as irrelevant. Apparently some subjective evaluations are considered more important than others! Given that the mid-1970s marked the start of neoliberalism, the promotion of the market and the reduction of government interference in the economy, this is surely significant. After all, the “global economy of the early 21st century looks a lot more like the economic textbook ideal that did the world of the 1950s ... All these changes have followed the advance of economists that the unfettered market is the best way to allocate resources, and that well-intentioned interventions which oppose market forces will actually do more harm than good.” As such, “with the market somuch more in control of the global economy now than fifty years ago, then if economists are right,the world should be a manifestly better place: it should be growing faster, with more stability, and income should go to those who deserve it.” However, “unfortunately, the world refuses to dance the expected tune. In particularly, the final ten years of the 20th century were marked, not by tranquil growth, but by crises.” Keen,Op. Cit., p. 2 These problems and the general unhappiness with the way society is going is related to various factors, most of which are impossible to reflect in mainstream economic analysis. They flow from the fact that capitalism is a system marked by inequalities of wealth and power and so how it develops is based on them, not the subjective evaluations of atomised individuals that economics starts with. This in itself is enough to suggest that capitalist economics is deeply flawed and presents a distinctly flawed picture of capitalism and how it actually works. Anarchists argue that this is unsurprising as economics, rather than being a science is, in fact, little more than an ideology whose main aim is to justify and rationalise the existing system. We agree with libertarian Marxist Paul Mattick’s summation that economics is“actually no more than a sophisticated apology for the social and economic status quo”and hence the“growing discrepancy between its theories and reality.”Economics, Politics and the Age of Inflation, p. vii] Anarchists, unsurprisingly, see capitalism as a fundamentally exploitative system rooted in inequalities of power and wealth dominated by hierarchical structures (capitalist firms). In the sections that follow, the exploitative nature of capitalism is explained in greater detail. We would like to point out that for anarchists, exploitation is not more important than domination. Anarchists are opposed to both equally and consider them to be two sides of the same coin. You cannot have domination without exploitation nor exploitation without domination. As Emma Goldman pointed out, under capitalism: “wealth means power; the power to subdue, to crush, to exploit, the power to enslave,to outrage, to degrade ... Nor is this the only crime ... Still more fatal is the crime of turning the producer into a mere particle of a machine, with less will and decision than his master of steel and iron. Man is being robbed not merely of the products of his labour, but of the power of free initiative, of originality, and the interest in, or desire for, the things he is making.” Red Emma Speaks, pp. 66–7] Needless to say, it would be impossible to discuss or refute every issue covered in a standard economics book or every school of economics. As economist Nicholas Kaldor notes,“each year new fashions sweep the ‘politico-economic complex’ only to disappear again with equal suddenness... These sudden bursts of fashion are a sure sign of the ‘pre-scientific’ stage is in, where any crazy idea can get a hearing simply because nothing is known with sufficient confidence to rule it out.”Essential Kaldor, p. 377 We will have to concentrate on key issues like the flaws in mainstream economics, why capitalism is exploitative, the existence and role of economic power, the business cycle, unemployment and inequality. Nor do we wish to suggest that all forms of economics are useless or equally bad. Our critique of capitalist economics does not suggest that no economist has contributed worthwhile and important work to social knowledge or our understanding of the economy. Far from it. As Bakunin put it, property “is a god” and has "its metaphysics. It is the science of the bourgeois economists. Like any metaphysics it is a sort of twilight, a compromise between truth and falsehood, with the latter benefiting from it. It seeks to give falsehood the appearance of truth and leads truth to falsehood.” The Political Philosophy of Bakunin, p. 179] How far this is true varies form school to school, economist to economist. Some have a better understanding of certain aspects of capitalism than others. Some are more prone to apologetics than others. Some are aware of the problems of modern economics and “some of the most committed economists have concluded that, if economics is to become less of a religion and more of a science, then the foundations of economics should be torn down and replaced”(although,“left to their own devices”, economists “would continue to build an apparently grand edifice upon rotten foundations.”). Op. Cit., p. 19 As a rule of thumb, the more free market a particular economist or school of economics is, the more likely they will be prone to apologetics and unrealistic assumptions and models. Nor are we suggesting that if someone has made a positive contribution in one or more areas of economic analysis that their opinions on other subjects are correct or compatible with anarchist ideas. It is possible to present a correct analysis of capitalism or capitalist economics while, at the same time, being blind to the problems of Keynesian economics or the horrors of Stalinism. As such, our quoting of certain critical economists does not imply agreement with their political opinions or policy suggestions. Then there is the issue of what do we mean by the term “capitalist economics”? Basically, any form of economic theory which seeks to rationalise and defend capitalism. This can go from the extreme of free market capitalist economics (such as the so-called “Austrian” school and Monetarists) to those who advocate state intervention to keep capitalism going (Keynesian economists). We will not be discussing those economists who advocate state capitalism. As a default, we will take “capitalist economics” to refer to the mainstream “neoclassical” school as this is the dominant form of the ideology and many of its key features are accepted by the others. This seems applicable, given that the current version of capitalism being promoted is neo-liberalism where state intervention is minimised and, when it does happen, directed towards benefiting the ruling elite. Lastly, one of the constant refrains of economists is the notion that the public is ignorant of economics. The implicit assumption behind this bemoaning of ignorance by economists is that the world should be run either by economists or on their recommendations. In section C.11 we present a case study of a nation, Chile, unlucky enough to have that fate subjected upon it. Unsurprisingly, this rule by economists could only be imposed as a result of a military coup and subsequent dictatorship. As would be expected, given the biases of economics, the wealthy did very well, workers less so (to put it mildly), in this experiment. Equally unsurprising, the system was proclaimed an economic miracle — before it promptly collapsed. So this section of the FAQ is our modest contribution to making economists happier by making working class people less ignorant of their subject. As Joan Robinson put it: “In short, no economic theory gives us ready-made answers. Any theory that we follow blindly will lead us astray. To make good use of an economic theory, we must first sort out the relations of the propagandist and the scientific elements in it, then by checking with experience, see how far the scientific element appears convincing, and finally re-combine it with our own political views. The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”to Modern Economics, p. 75 Category:Libertarian Socialist Wiki Category:An Anarchist FAQ